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Bearish View on Coach

On Oct 31, 2013, we downgraded our recommendation on Coach, Inc. (COH - Free Report) to Underperform from Neutral with a price target of $46.00.

Why the Downgrade?

Estimates for Coach have shown a downtrend since the company reported first-quarter fiscal 2014 results on Oct 22, 2013. The company disappointed on the sales front, which declined 1% to $1,150.8 million, after increasing 6% during fourth-quarter fiscal 2013, due to softness in the North American market. Net sales also fell short of the Zacks Consensus Estimate of $1,191 million.

Total North American sales fell 1% to $778 million. Direct-to-consumer sales decreased 1%, while comparable-store sales dropped 6.8%. Coach sells products that are discretionary in nature, and in turn depends upon consumers’ disposable income.

Fashion obsolescence remains the main concern for Coach’s business model, which involves a sustained focus on product and design innovation. The company’s pioneer position may be compromised by delays in product launches. The company operates in the highly competitive premium handbag and accessories segment.

The bottom line also failed to impress investors, remaining flat at 77 cents a share with the prior-year quarter and the Zacks Consensus Estimate.

The softness in results triggered a downtrend in the Zacks Consensus Estimate, as analysts become less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 9.2% to $3.46 for fiscal 2014 and 10.1% to $3.81 per share for fiscal 2015 in the past 30 days.

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